Facebook’s increasing level of ad sophistication

Citation

(2013), "Facebook’s increasing level of ad sophistication", Journal of Consumer Marketing, Vol. 30 No. 1. https://doi.org/10.1108/JCM.07730aaa.002

Facebook’s increasing level of ad sophistication

Article Type: Internet currency From: Journal of Consumer Marketing, Volume 30, Issue 1

Edited by Dennis A. Pitta, University of Baltimore

In the last Internet Currency column, we stated that for the last several years, the focus of this column has been the marketing developments and implications of social media. As the new media developed, it was hoped that they would be useful tools to increase revenue. Some of the initial excitement about Facebook’s initial public offering may have been rooted in the hope that its extensive reach, frequency, information exchange, and involvement would translate into an effective marketing tool. To that point, a variety of sources report staggering numbers of Facebook users and estimate that up to 20 percent of women in the US use Pinterest (Parent, 2012). Those figures could not be ignored. Neither could the remarkable level of interactivity between users and Facebook pages as well as among users. Facebook approaches the ideal of universal communications by making interaction easy. Moreover, it allows expansion of user interactions through the social networks it can develop. However, it has not met its potential to gennerate revenue.

We have looked at a variety of social media vehicles and noted that social media by itself is not effective in driving sales. A recent study by Forrester verified that statement starkly and asserted that less than 1 percent of online purchases are influenced by social media (Indvik, 2012). The study examined 77,000 online transactions and tried to trace their source to a social network like Facebook or Pinterest. That 1 percent result must be disappointing to investors. Despite that figure, the internet is useful in consumer purchasing. For consumers who are looking for something specific, their searches account for 39 percent of new customer transactions. There are some concerns with the study including the relatively short study period. However, the results show that social media are complex vehicles which need to be understood.

Social media metrics

A vital first step in understanding the characteristics of social media is discovering the types of promotional possibilities each medium possesses. Arguably, the most interesting vehicle, Facebook, enjoys unprecedented penetration with over 835,525,000 users worldwide as of 31 March 2012 (Internet World Stats, 2012). At the time of its initial public offering (IPO) on May 18, 2012, it was priced at $38 a share (Wall Street Journal, 2012). Projections made before the IPO estimated a stock price that might be 100 times earnings (La Monica, 2012). The high price earnings ratio highlighted Facebook’s lack of clear revenue generating mechanisms at the time.

That situation has become clearer. Facebook has the potential to support three major types of communication. One is termed “owned media” which refers to a company’s Facebook page. A second is “paid media,” which refers to ads that can be paid for on the Facebook Marketplace. A third type is “earned media,” which refers to the increase in exposure that results from social interaction through “likes, shares, or check-ins.” Tracking such media effects is complex.

Of the three, paid media represents Facebook’s revenue potential. Social media research firms have identified four distinct types of paid Facebook (FB) advertising (Kenshoo Social, 2012). They include:

• Post qds. Post ads result from posts in a company’s FB page, which are then placed on the FB homepages of targeted users.

• Sponsored stories. Sponsored stories are user created. Users interact with others around a brand and generate the essence of an ad, which the company can then refine and use to target others. There are several major outcomes of sponsored stories. The three most important in order of difficulty are: posting a “Like,” using an application, and sharing an application.

• Web ads. A web ad is aimed at FB users to engage with the brand outside of Facebook. Links connect them to a corporate owned or sponsored web site.

• Social ads. Social ads encourage FB users to visit a company’s FB page or other pages like “fan” pages that focus on the company or its products.

In all cases, FB has the potential of earning revenue and the company can gain contact with potential customers.

Types of ads and their effects

Marketers know the familiar advertising hierarchy of effects and its link to ad cost and effectiveness. There are a variety of versions of the hierarchy which commonly includes increasingly difficult to reach stages of effects on consumers who are the targets of advertising. The progression of effects of a typical version of the hierarchy from

represents different challenges to advertisers. Awareness is much easier and cheaper to attain than conviction (also known as brand preference). By itself, it is also largely ineffective at increasing sales. Facebook’s observers seek higher levels of purchase. It is critical to understand which form(s) of FB advertising are more likely to lead to purchase, in order to choose the correct ad mix.

The Kenshoo Social whitepaper reports research that details the effectiveness of advertising using now accepted social media metrics including click through rates, cost per click and the traditional cost per thousand. Click through rates (CTR) are the measures of consumer progress resulting from an ad. The higher the rate, the more consumers click on some link to learn more. Cost per click measures the cost of generating a consumer click through. Cost per thousand (CPM) is the traditional measure of assessing the cost of reaching one thousand targeted receivers.

Results

The research demonstrates that in terms of click through rates, which associate with awareness, Post Ads and Sponsored Stories generate nearly double the response rate of Social Ads and Web Ads. The probable cause is that post ads often contain some incentive or special offer that prompts action. Since sponsored stories come from users, they are probably more relevant to them than the other forms.

Similarly, high click through rates (CTR) equate to lower cost per click (CPC). One consideration is that both the Post Ads and Sponsored Stories are the easiest to track because they drive consumers to specific pages or web sites.

The most important element under consideration, effectiveness in promoting purchase, is closely linked to involvement and the report shows that involvement is costly. Sponsored Stories carry the highest cost per thousand (CPM) of the four. Investigating further, the study reports that the click through rates of the three outcomes, range from highest to lowest and cheapest to most expensive as: Post like, to Using an application, to Sharing an application. Presumably, the order is linked to ease. It is easier to post a like than to go through the trouble of installing an application. Similarly, sharing an application requires even more effort. In terms of cost. One lesson is that the most valuable results, sharing applications and installing them carry a higher price than just posting a like.

In social media terms, adopting an application forms a bond between the user and an advertiser. For example, an airline’s booking application dedicated to frequent fliers, ties the user to that airline. It has the potential of capturing a large amount of share of wallet. Furthermore, multiplying the effect of an ad through sharing an application with others is even more important.

Conclusions

Social media have reached the stage which traditional advertising media achieved years ago. The understanding of the characteristics of the various media and their elements as well as their strengths, weaknesses, costs and ability to promote purchase are more clearly understood. For Facebook advertisers, armed with a knowledge of their goals and the abilities of combinations of social media elements to achieve them, the future looks more professional. For Facebook itself, increasing understanding on the part of advertisers, promises more robust revenue and profit levels.

In our next issue, we will investigate other informative sites and invite readers to submit their favorite internet sites for our consideration.

Reader requests

Please forward all requests to review innovative internet sites to: Dr Dennis Pitta, University of Baltimore, 1420 North Charles Street, Baltimore, MD 21201-5779, USA. Alternatively, please send e-mail to: mailto:dpitta@ubalt.edu for prompt attention.

References

Indvik, L. (2012), “Social media influences less than 1 percent on online purchases”, Mashable Business, September 25, available at: http://mashable.com/2012/09/25/social-media-sales-forrester

Internet World Stats, Usage and Population Statistics (2012), Internet World Stats, Usage and Population Statistics, available at: http://www.internetworldstats.com/facebook.htm

Kenshoo Social (2012), Social Media Insights – Part 1: Metrics That Matter: Introducing Exposure Rate, a New Facebook Advertising KPI, White paper, June, available at: http://www.kenshoo.com/socialmediainsights

La Monica, P. (2012), “Facebook is great. But $100 billion great?”, CNNMoney, February 2, available at: http://money.cnn.com/2012/02/02/technology/thebuzz/index.htm

Parent, S. (2012), “Less than 1 percent of online purchases influenced by social media”, eBay Partner Network, September 25, available at: http://www.ebaypartnernetworkblog.com/en/2012/09/less-than-1-of-online-purchases-influenced-by-social-media/

Wall Street Journal (2012), Wall Street Journal, available at: http://stream.wsj.com/story/facebook-ipo/SS-2-9640/

About the author

Dennis Pitta
Professor of Marketing at the University of Baltimore. Dennis Pitta can be contacted at: dpitta@ubalt.edu mailto:dpitta@ubalt.edu